FOREIGN INVESTMENTS IN PAKISTAN

MULAZIM ALI KHOKHAR (Research Analyst)
Sep 8 - 14, 2008

OVERVIEW

Lack of economic and political stability has been Pakistan's dilemma that has blind folded the existing investment opportunities in the country. We have been very slow at capital formation and the little chunk of the investments which flow in Pakistan could never be negotiated on long terms basis. As such, the foreign investors keep their back doors open for exit at any unfavorable time.

The same is being witnessed today as the political transition along with worsening law & order situation has played havoc with the economy and foreign investment in Pakistan. For the FY-08 foreign investments have declined by 38.39% (US $ -3.23 billion) to US $ 5.19 billion as against last year investments of US $ 8.43 billion. The major decline was witnessed in portfolio investments and privatization proceeds i.e. by 98.78% (US $ -3.25 billions) and 49.92% (US $ -132 million) respectively. We can see in the graph that the portfolio investments have almost vanished from the scene.

FACTS AND FIGURES

Foreign direct investments in Pakistan have been growing at a robust 5 year cumulative aggregate growth rate (CAGR) of 52.65% & the total foreign investments at 42.46%. FDI has grown approximately 11 folds compared to FY-04 which stood US$ 485 million in FY-08 and today it accounts for US$ 5,152.8 million. Portfolio investments have been most volatile, which stood at US $ 311 million during FY-04, marked high of US$ 3,288.30 million during FY-07, but declined to US $ 40.16 million for the FY-08.

COUNTRIES CONTRIBUTING TO FDI IN PAKISTAN

Most of the FDI in Pakistan comes from its War on Terror Ally "USA". During FY-08 USA accounted for more than 25% of the FDI i.e. out of US $5152.8 million USA accounted for US $ 1309.30 million. The second most inflow of the FDI was from United Arab Emirates which accounted for almost 11.5% of the total FDI i.e. US $ 588.6 million. The third most FDI provider country was United Kingdom with US$460.20 million invested i.e. accounting for almost 9% of total FDI flowing in Pakistan during FY-08.

The main contributions in FDI are from Communication, Financial Business and Oil & Gas amounting to 31.54%, 31.20% & 12.32% respectively. During FY-08 IT & Telecom sector attracted US$ 1625.30 million, Financial Business especially privatization proceeds for banking sector earned US $1607.60 million and Oil and Gas Sector received US$ 634.80 million.

FOREIGN INVESTMENT NECESSARY FOR PAKISTAN

For a developing nation with less capital at home, it is very essential to attract foreign investments to multiply its existing production capacities and explore for the more. The investment phenomenon really works aggressively for the economic development. As we saw earlier the investments in Pakistan were growing for the last 5 years at CAGR of about 52.65% and so was our economy. It grew at an average annual growth rate of 7% for the last 5 years.

But as the investments have declined for the last 10 months our GDP growth rate has also declined to 5.8%, the country's foreign reserves have declined from US$ 16.49 billion during September 2007 to US $ 9.57 billion on 21st August 2008 i.e. down by US $ 6.92 billion which was enough to cover 3 months imports bills. The current account deficit for the FY-08 has been US $14 billion i.e. 8.4 percent of GDP and is more than double the FY-07 figures. Our trade deficit is mounting like anything and in the situation of Global commodity inflation it will be very hard for Pakistan to survive as a developing nation if it is not able to curtail un-necessary expenditure and maintain a decent economic growth pace.

FUTURE OUTLOOK

In the current situation of fragile balance of payment position and worsening economic indicators, Pakistan badly needs to boost industrial productions and achieve more stable economy. For that it needs to improve and mobilize its foreign resource to augment real infrastructure development in Pakistan to offer long term stability in economic activities.

Analysts are predicting further slow down if the Government is not successful in attracting more investments and controlling terrorism & political chaos. Foreign Investments toady are like back bone of Pakistan's economy and the Government official seems on their toes to attract a few more privatization and acquisition deals in Pakistan from investors abroad so as to survive in the recent future.

In this regard, GOP has decided to privatize OGDCL or its subsidiaries on priority basis and a loan of about US $ 4 billion from ADB and World Bank is much awaited to support budget deficit and foreign reserves accounts. The State Bank governor Shamshad Akhtar said that the World Bank has affirmed its support on fast-track basis of US $1 billion of investments in Pakistan, which badly needs billions of dollars to keep its economy afloat. She further assured of its resolve to narrow its fiscal deficit, and is aiming for net zero State Bank borrowings by the Government for each quarter.

These will help mobilize the economic development activities and achieve stability and further attract new investments in the country.